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What is the impact on your disposable income from higher interest rates?
Not much, if you have little to no debt.
When central banks raise their policy rates, consumers’ spending power isn’t impaired automatically. It is the cost of servicing new debt for governments, companies and consumers that increases. The length at which interest rates on their current debt are fixed matters.
Governments may afford smaller budget deficits. Companies may only finance investments with returns high enough.
Consumers may spend less. The impact for households is limited where almost all mortgages are fixed for the long term, as for example in the US. The impact of higher rates is much bigger in countries where:
There are other important differences across countries. Where mobility is high, the selling prices of houses have a bigger impact on their owners’ wealth.
When inflation will be lower, falls in house prices may make some central banks more dovish. The interesting thing is that the reaction function of central banks around the world will be different. Some may continue hiking while others start cutting. New Zealand even has house price stability in their mandate (though it was intended to limit exorbitant price increases).
What could be the consequences? Potentially, higher inflation in the long term as central banks may move away from restrictive territory before reaching their inflation target.
Figure 1: House prices since 2008
Source: DPAM 03.2023
Figure 2: House prices since 2022
Source: DPAM 03.2023
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